In this article: The mortgage rate lock process explained, the pros and cons of locking in, and how it compares to floating.
If you’ve been researching the mortgage application process lately, you’ve probably heard about a “mortgage rate lock.” This is an important step in the lending process, because it partly determine the amount of interest you’ll pay over the long term.
But what it a mortgage rate lock, exactly? How does the process work? What are the pros and cons of “locking in” your rate? Those are just a few of the topics we will cover below.
What Is a Mortgage Rate Lock?
Let’s start off with a basic definition and move on from there.
A mortgage rate lock is a lender’s commitment to guarantee or “hold” a certain interest rate for a certain period of time, usually until the closing. So, even if market interest rates go up during that timeframe, the borrower will still be able to get the lower, locked-in rate.
That’s our definition. Here’s another, according to the Consumer Financial Protection Bureau:
“A lock-in or rate lock on a mortgage loan means that your interest rate won’t change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application.”
With that definition out of the way, let’s take a look at how the “locking” process works.
Here’s How the Process Works
Before you choose to lock in an interest rate, you need to understand how the process works. This will help you accomplish your financing goals while avoiding common missteps.
Here’s how the rate lock process usually works:
- Apply for a loan: The mortgage rate lock process starts with the loan application. You’ll need to complete a standardized loan application and provide the lender with information / documents relating to your income, assets, debts and credit history.
- Get a rate quote: After the mortgage lender has reviewed your application, they will give you a quote with a specific interest rate. Your rate can be influenced by several factors, including your credit score, income, and down payment amount.
- Decide whether or not to lock: The next step is to decide whether or not you want to lock-in your interest rate. You can either lock the rate at this stage, or let it “float” in case market rates decline. Remember, the whole point of a rate lock is to protect you against potential increases in interest rates during the time between application and closing.
- Sign an agreement: If you decide you want to lock your mortgage rate at this stage, the lender will provide you with an agreement to that effect. This agreement will explain the terms of the rate lock, the actual interest rate they are offering, and any fees you might incur. Be sure to read this document carefully before signing.
- Pay any applicable fees: If your rate lock is being offered for a short period of time (like 30 – 45 days), you might not encounter any fees. However, for a longer lock-in period, mortgage lenders often charge fees. In most cases, these fees become part of the borrower’s closing costs and are paid when the loan closes.
Bear in mind that mortgage rate locks aren’t always needed. As a borrower, you have to decide whether or not it will work to your advantage. You’ll want to consider the length of time it will take to close the loan, and the likelihood of rising interest rates during that time. You should also consider the cost of locking in your mortgage rate, versus the risk of floating it.
Benefits of Locking in Your Rate
Locking your mortgage rate protects you from interest rate increases that might occur between your loan application and final closing. But there are other benefits as well.
- Predictability: One of the biggest benefits of a mortgage rate lock is that you’ll know for sure what rate you’ll end up with. This helps with budgeting and planning.
- Protection against rate increases: The whole point of locking in a mortgage rate is to shield yourself from potential increases that occur prior to closing. If market interest rates rise during your lock period, you will still qualify for the lower rate quoted upfront. This could potentially save you thousands of dollars over the life of the loan.
- Peace of mind: Locking in a mortgage rate can also provide peace of mind for borrowers concerned with rising rates. This process allows you to focus on other aspects of the home-buying process, without worrying so much about your interest costs.
- Avoiding delays: If rates rise significantly between the application and closing, you might have to re-qualify for the loan at the higher rate. This could delay the closing process and cause unwanted stress. Locking can help you avoid this issue.
Potential Risks and Downsides
Like most aspects of the mortgage lending process, rate locks have potential benefits as well as drawbacks. We just covered the primary advantages of locking in. Now, let’s shift gears and looking at the possible downsides.
- Fees: As mentioned above, some lenders charge fees to lock in a mortgage rate. This can add to the overall cost of the loan. So be sure to ask about this upfront, when you are applying for the loan. Find out if there is a fee and how much it will be. This will help you decide if the rate lock is worthwhile, given the protection it provides.
- Risk of missing out on a lower rate: Borrowers often worry about the possibility of a rate increase while their loans are being processed. But it’s also possible for rates to decline during this timeframe. This is another potential downside of locking in. If interest rates go down between the application and closing process, you would still be stuck with the higher, locked-in rate. And that could cost you more money in the long run.
- Limited lock periods: Mortgage rate locks usually only last for a certain period of time, such as 30 to 60 days. That’s fine if you can close within that timeframe. But if your loan doesn’t close during the lock-in period, you might have to pay an extension fee to keep it locked, or else “re-lock” at current market rates. Both of these scenarios could delay the mortgage process and possibly the closing date.
Borrowers should carefully consider the risks and potential downsides of a mortgage rate lock, before making a decision. For some borrowers, it might be better to take the risk of “floating” (discussed below) and hope for a lower rate. In other cases, it might be best to lock in a rate for peace of mind and protection. It really comes down to how comfortable you are with risk and uncertainty.
Locking vs. Floating: It’s a Gamble
Instead of locking in a mortgage rate, borrowers can choose to “float” the rate. This means they take the risk of interest rates going up, while hoping that they go down. This can be a good option for borrowers who are (A) comfortable with risk and (B) believe that interest rates will either remain flat or decline.
But beware. Floating a mortgage rate does carry some risk. For one thing, there’s no guarantee you’ll get a lower rate by floating. So, borrowers who choose to float should be prepared for the possibility of rates going up. More importantly, they have to make sure they’ll still be able to afford the loan at the higher rate.
When Does It Make Sense to Lock Your Rate?
We’ve covered the definition, the process, and the pros and cons of a mortgage rate lock. The next question is, when does it make sense to use it?
Here are some things to consider, when deciding whether a mortgage rate lock is right for you:
- How long will it take to close the loan? If you expect the loan to close quickly, it might be wise to lock in a rate to protect against potential increases. On the other hand, if it’s going to take longer to close the loan, you could take the risk of floating while hoping to get a lower rate.
- How likely is it that interest rates will go up? If you think there’s a good chance interest rates will go up before your closing, it might be a good idea to lock in a rate to guard against it. On the other hand, if you think rates are likely to stay the same or go down, floating might be the best option.
- What’s the cost of locking versus the risk of floating? Is your mortgage lender going to charge you a fee for locking in your rate? In that case, you’ll need to compare that cost to the potential savings of getting a lower rate (by floating).
- How comfortable are you with risk? Some borrowers are willing to take the risk of floating, in hopes of getting a lower rate. Others prefer the security and predictability offered by a lock-in. Where do you stand?
Ultimately, the decision to lock in a mortgage rate is a personal one and will depend on your individual circumstances and risk tolerance.
So there you have it, the mortgage rate lock process explained. We hope you have found this article helpful and wish you well in your home-buying endeavors.
Disclaimer: This article is intended for a general audience. So portions of it might not apply to your particular situation. The lending process can vary from one borrower to the next, for a number of reasons. We encourage you to conduct additional research into this topic before making any financial decisions.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author